Cara Therapeutics, Inc. (CARA) Earnings Call Transcript & Summary

Good afternoon. My name is Latif, and I will be your conference facilitator. I would like to welcome everyone to the Cara Therapeutics Third Quarter Financial Results and Update Conference Call. [Operator Instructions] Please be advised that this call is being recorded. I would now like to introduce Matt Murphy, Cara's Manager of Investor Relations. Mr. Murphy, you may begin your call.

Thank you, operator, and good afternoon. After market close today, Cara issued a news release announcing the company's financial and operating results for the third quarter of 2023. Copies of this news release and the associated SEC filing can be found in the Investor section of our website at www.caratherapeutics.com. Before we begin, let me remind you that during the course of this conference call, we will be making certain forward-looking statements about Cara and our programs based on management's current plans and expectations. These statements are being made under the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties. Actual results may differ materially due to various factors, and Cara undertakes no obligation to update or revise these statements publicly as a result of new information or future results or developments. Investors should read the risk factors set forth in Cara's 10-K for the year ended December 31, 2022 and any subsequent reports filed with the SEC, including its Form 10-Q for the quarter ended September 30, 2023. That said, I'd like to turn the call over to Chris Posner, Cara's Chief Executive Officer. Chris?

Thanks, Matt. Good afternoon, everyone, and thank you for joining our call. With me today are Ryan Maynard, our Chief Financial Officer; Dr. Joana Goncalves, our Chief Medical Officer; and Scott Terrillion, our General Counsel and Head of Government Affairs. Our strategy at Cara Therapeutics is to change the treatment of chronic pruritus with our innovative and differentiated asset difelikefalin. Our highest priority is to execute on our 3 unique, late-stage programs in dermatology and nephrology, which drive the greatest potential long-term value for our company, and we are excited to have multiple fully funded value inflection milestones within these programs over the next 12 months. Today, I will provide an update on the funding of our wholly owned oral difelikefalin pipeline. Next, I will discuss the progress in our 3 late-stage programs, including expectations for Part A of our KIND 1 atopic dermatitis study, which is scheduled to read out in December of this year. Finally, I will address the performance of KORSUVA injection in the U.S. and discuss the recently released 2024 ESRD rule. After that, Ryan will provide a financial update, and we will subsequently open up the call to Q&A. With that, let me start with our recent announcement regarding the monetization of our ex-U.S. royalties for KORSUVA Injection and Kapruvia. On November 1, we entered into a royalty interest purchase and sale agreement with HealthCare Royalty. Under the terms of the agreement, Cara received an initial payment of $17.5 million, less certain expenses. We will receive an additional payment of $20 million upon Kapruvia receiving a certain minimum price in Germany, which is expected to occur this quarter. In addition, Cara will receive a $2.5 million milestone payment based upon achieving certain 2024 performance levels of KORSUVA in Japan. In exchange, HealthCare Royalty will receive all royalties due to Cara from KORSUVA Injection and Kapruvia ex-U.S. license agreements with CSL Vifor and Maruishi. The aggregate royalty payments to HealthCare Royalty are capped at 2x the payment to Cara if received before the end of 2029. Otherwise, the payments are capped at 2.8x after which Cara will resume receiving all royalties from both CSL Vifor and Maruishi. The arrangement with HealthCare Royalty specifically excludes KORSUVA injection in the U.S. and all of Cara's oral difelikefalin internal development programs. Non-dilutive financing is an important part of our strategy to drive the continued development of our very promising pipeline, which has always been key to building sustainable long-term value for Cara. Closing this nondilutive transaction extends our cash runway into 2025. This helps us reach critical catalysts and milestones that we believe will display the potential of our difelikefalin pipeline and start to display the underappreciated value in Cara. Next, let me discuss the progress of our multiple late-stage pipeline programs. First, our Phase III KIND 1 trial in pruritus associated with atopic dermatitis is approaching a key near-term milestone. We now plan to release top line efficacy and safety data for Part A, the dose finding portion of this trial in mid-December in order to increase the visibility into this trial. Recall chronic pruritus is the most common and most burdensome symptom of atopic dermatitis, affecting almost 100% of the approximately 12 million adult patients in the U.S. In recent years, there has been significant investments and innovation in the treatment of moderate to severe AD, resulting in the development and approval of new biologics and JAK inhibitors. Despite these developments, a large segment of the AD market remains underserved. We are targeting roughly 1/4 of the total AD market. These are mild to moderate AD patients with moderate to severe itch, also referred to as itch dominant AD. Numerically, that's about 3 million addressable itch dominant patients in the U.S. who are primarily managed with topical corticosteroids. While TCS may treat skin lesions, they often fail to effectively address the burdensome chronic itch that severely impacts these patients' quality of life. So there is a significant void in the treatment continuum and a need for an oral therapy with a favorable safety and tolerability profile to effectively treat the debilitating itch in these patients. Our KIND program is tailored to specifically address this unmet need for a targeted oral antipruritic treatment for mild-to-moderate AD patients who are very itchy. No company to date has focused on this market segment and enriched its trials with this patient phenotype. Today, we could confirm that 80% of the patients enrolled in Part A of KIND 1 have a baseline body surface area of less than 10% and a mean itch score of greater than 7, meaning most patients in the trial had mild-to-moderate skin lesions with severe itch. As you will recall, this is also the subgroup of patients that showed the best clinical benefit with oral difelikefalin in our KARE Phase II monotherapy trial. In contrast to our Phase II trial, our Phase III KIND program is designed to mimic likely future real-world utilization in patients. Difelikefalin is used on top of mid-potent TCS and compared to TCS alone, an active comparator. With this higher clinical hurdle and 4 treatment arms, part A of KIND I is not powered for statistical significance. We've enrolled 287 patients with the intent to select the most favorable dosage strength and determine the sample size for the confirmatory part of the Phase III program. The KIND-1 Part A readout is a significant catalyst and mirrors the future of this program. We believe that Part A will be a good proxy for the likely outcomes of the confirmatory KIND-1 Part B, and KIND-2 studies. The patient enrollment criteria, study conduct, and endpoints in the confirmatory studies are expected to be the same as for KIND 1 Part A. In addition, the study sites from Part A will participate in Part B along with some new added sites. We are excited to share the results of KIND 1 Part A with you in the near future. Now, turning to our other 2 late -stage programs that also target sizable patient populations with a lack of treatment options. Enrollment in our Phase III KICK I and II trials in pruritus associated with advanced chronic kidney disease is progressing well, and we continue to expect top line results in the second half of 2024. The approval of KORSUVA Injection validated this mechanism, laying the foundation for our nephrology franchise. We see a natural extension of difelikefalin into earlier-stage patients with the oral formulation. There are roughly 300,000 pre-dialysis advanced stage CKD patients who suffer from moderate to severe pruritus in the U.S. alone. Importantly, these patients do not fall under the capitated reimbursement system that covers dialysis patients. Hence, we see a significant commercial opportunity in this underserved patient population. Our Phase II/III COURAGE 1 trial in notalgia paresthetica is tracking to its first data readout of Part A in the second half of 2024. With no approved therapies and an addressable population of at least 650,000 patients in the U.S. who are under the care of a provider, most often a dermatologist, we believe oral difelikefalin has the potential to unlock a sizable, new market in dermatology. Now, let me turn to the performance of KORSUVA injection in the U.S. For the third quarter of 2023, net sales for KORSUVA were $4.4 million, translating into $1.9 million of profit recorded as revenue to Cara. Wholesaler shipments to dialysis clinics totaled 91,000 vials, a 36% increase from the prior quarter. 68% of these vials were shipped to Fresenius clinics and the remainder split between DaVita and the other dialysis organizations. At Fresenius, orders grew by more than 37% quarter-to-quarter, reaching 62,000 vials. By the end of the third quarter, over 1,000 Fresenius clinics or 37 % had placed reorders. That's up from 27% at the end of the second quarter. Additionally, 1,478 clinics or 55% had dosed at least 1 patient at the end of the third quarter. Importantly, following the ESRD Prospective Payment System rule, Fresenius decided to reallocate remaining inventory that was shipped in the third quarter of 2022 within its network of clinics. As a result, we expect shipments from CSL Vifor to wholesalers to be small in the fourth quarter of this year and the first quarter of 2024, translating into minimal revenues accrued to Cara in these quarters. At DaVita, we continue to observe steady growth in demand. Orders grew by 20% quarter-to-quarter to 13,000 vials. Over 500 clinics or 19% had ordered KORSUVA at the end of the third quarter. That's up from 15% at the end of the second quarter. Reorder rates remained strong with 76% of clinics placing repeat orders. As a reminder, since there is minimal inventory held at DaVita clinics, we believe the growth in clinic orders represents a good proxy for the growth in patient demand. At midsize and independent dialysis organizations KORSUVA utilization continued its momentum. Orders grew by 47% quarter-to-quarter to over 16,000 vials. At the end of the third quarter, 18% of clinics in this market segment had placed orders. That's up from 17% at the end of the second quarter. In addition, 77% of these clinics placed repeat orders, up from 68% at the end of the second quarter. U.S. Renal care remains the largest buyer of KORSUVA in the MDO IDO segments. Approximately 80% of USRC clinics had ordered KORSUVA by the end of the third quarter and 83% of these clinics have placed repeat orders. Overall, our expectations for KORSUVA injection are now greatly reduced. But we remain confident in the mechanism of action and benefit of KORSUVA. The provider and patient feedback for KORSUVA remains highly positive and its good clinical performance has continued to fuel growth in vial demand. But its use will not likely reflect the existing clinical need. The significant challenges in the uptake of KORSUVA, even with its TDAPA-designation stem from the unique capitated dialysis reimbursement system in the U.S., which really does not foster innovation. On October 27, CMS published the End Stage Renal Disease Prospective Payment System final rule for the calendar year 2024. We are disappointed that CMS rejected our request to extend the TDAPA period for KORSUVA. Furthermore, CMS maintained the proposed methodology for calculating the add-on adjustment which, in our view, is flawed and results in a significant shortfall in funding for KORSUVA and other innovative drugs with TDAPA designation in the future. As a result, we now believe that KORSUVA's commercial potential will be meaningfully lower than we previously expected. However, Cara fundamentally is a development company and our greatest source of value is our wholly owned oral difelikefalin pipeline. We remain laser-focused on maintaining a strong balance sheet and driving progress in our 3 late-stage programs to deliver value catalysts ahead. I would now like to turn it over to Ryan for additional details on our third quarter financial results. Over to you, Ryan.

Thank you, Chris. I would like to first take a moment to reinforce what we have stated about our very important financing transaction with HealthCare Royalty. We were able to bring forward the value of our ex-U.S. and Japan royalties and add to our balance sheet in a meaningful way. This allowed us to extend our cash runway in the non-dilutive manner that we have been socializing with the investment community over these last few quarters. As Chris mentioned, we have received the initial payment of $17.5 million and we fully expect to receive the first milestone of $20 million by the end of this quarter. Now on to the Q3 results. Total revenue was $4.9 million for the 3 months ended September 30, 2023, compared to $10.8 million for the same period in 2022. Revenue this quarter consisted of $1.9 million of collaborative revenue related to our profit from CSL Vifor's net sales of KORSUVA injection to third parties; $1.4 million from the milestone payment earned from Maruishi for marketing and approval of KORSUVA injection in Japan; $1.3 million of commercial supply revenue; and finally, $167,000 of royalty revenue, representing our royalties from the net sales of Kapruvia in Europe. Remember that revenue in the same period last year included the large stocking order from FMC. Cost of goods sold was $1.6 million for the 3 months ended September 30, 2023, compared to $3.1 million for the same period in 2022. As a reminder, cost of goods sold relates to our shipments of KORSUVA injection to CSL Vifor. Research and development expenses were $25.5 million for the 3 months ended September 30, 2023, compared to $24.7 million in the same period of 2022. The slight increase in R&D expenses is primarily due to the increased clinical trial spend related to our 3 late-stage clinical programs, offset by a decrease in stock-based compensation expense. Also, R&D expenses for the 3 months ended September 30, 2022, included $5 million related to a milestone paid to Enteris BioPharma Inc. General and administrative expenses were essentially flat at $6.8 million for the 3 months ended September 30, 2023, compared to $6.9 million in the same period of 2022. Cash, cash equivalents and marketable securities at September 30, 2023, totaled $83.3 million compared to $101.7 million at June 30, 2023. The decrease of $18.4 million this quarter was due to cash used in operating activities. Finally, we expect that our current unrestricted cash, cash equivalents and available-for sales marketable securities, including the proceeds from our recently announced royalty financing and the collaborative revenue from our share of profit from KORSUVA will be sufficient to fund our currently anticipated operating plan into 2025. Now back to you, Chris.

Thanks, Ryan. So, in summary, I want to highlight the tremendous opportunity we see within our company. Cara's oral difelikefalin franchise has significant potential, and we know that the innovation in this product delivers value when used. We have 3 late-stage programs in sizable indications, which, in our view, are not recognized by the market today. Our improved cash runway allows us to reach multiple value inflection points, which will start to display the potential of our pipeline. We believe that our KIND 1 Part A readout in December represents the first milestone and we look forward to sharing the data. Now with that, Ryan, Jo, Scott and I will be happy to take your questions. So, Latif, you can open up the line to Q&A.

[Operator Instructions] Our first question comes from the line of Joseph Stringer of Needham & Company.

Just on KICK 1 and KICK 2, can you provide any more detail on some of the enrollment metrics? You mentioned that enrollment is tracking well and you're on schedule for topline readout second half next year. But just curious on screen failure rates, are those in line with expectations and what are some of the most common reasons for, say, a screening failure? And then, any plans to open additional target sites for either of those?

Joey, thanks for the question. Let me give that to Jo and she could address some of that.

Yes, so as Chris had mentioned earlier, so we are on track as per our anticipation of how the study should be running. We don't typically give any details regarding the metrics. So at this stage, we won't comment on that. but very pleased with it and on track with the readout next year.

[Operator Instructions] Our next question comes from the line of Dennis Ding of Jefferies.

This is Anthea on for Dennis. 2 from us. First, what is your commercial strategy post TDAPA and what is the best way to maximize KORSUVA value for shareholders in your view post CMS decision? And then secondly, what are any additional ways to extend cash runway beyond the royalty deal recently announced that you're looking at?

Thanks, Anthea. Yes, let me tackle the first one. So here's our expectation. First of all, let me just say, we have really a great partner in CSL Vifor in the U.S. And what we expect, given obviously the diminished sales potential due to the lack of funding that CMS put in place with the final rule, we think nothing will change in the promotional outlook for this year. But next year, we would expect more limited promotion from CSL Vifor, quite frankly, and that will be really tied to the diminished sales potential. So that's how we see kind of the promotional activities moving forward. And I think your second question, I'll turn to Ryan.

Yes, I'll take that one. So, we're very pleased that the financing that we accomplished allows us to get through 3 very meaningful value inflection milestones for the company. And as you know, those are the Part A data in atopic dermatitis. That's the kind -- the KICK 1 and KICK 2 readouts next year as well as Part A for the notalgia paresthetica. So we are in a position with our runway to get through those. So, we're happy where we are at that point. So, no comment on future financing needs.

Our next question comes from the line of Sumant Kulkarni of Canaccord Genuity.

I have 2. So, the first is on your oral difelikefalin program for advanced CKD. Clearly, reimbursement dynamics are very different for this market versus for the dialysis market on IV KORSUVA, but how confident are you in the commercial potential for treating itch in non-dialysis CKD given this dynamic? And how are you internally prioritizing your dollars for this indication versus AD and P because of what happened with the dialysis market here?

Yes. Well, think your first question, Sumant, is around the different reimbursement ecosystems that both play in. I mean KORSUVA injection obviously plays in the most unique of reimbursement systems. And we talked about that in some of my prepared remarks, and that's in a bundled system, and that will not play -- that's not the system that oral difelikefalin and advanced CKD will launch into. It's more of a -- we're used to more of a traditional retail pharmaceutical market. We're really very bullish on advanced CKD. Again, we estimate the addressable population of around 300,000. There's roughly 1.2 million Stage 4 and 5 and around 30% of them are identified to have moderate to severe itch. I think the other thing we've learned, even marketing to nephrologists or CSL is done, is that there is a significant unmet need. And these patients with this debilitating severe itch have significant implications on their quality of life. So, listen, end of the day, if funding were available for KORSUVA injection, we think that product would have a very long runway. With oral difelikefalin, we're really pleased. I think your other question, though, you asked around AD and how we prioritize AD in notalgia paresthetica and CKD. I mean, if you're asking me what my favorite child is, I won't say that, I think all 3 are incredibly valuable programs. They all have very sizable, addressable patient populations, and they all have one thing in common, there is no available treatments. We would be the first FDA-approved treatments across these 3 indications. It's a really differentiated positioning to be in. That's why we're so excited about and we've always been excited about the oral pipeline.

And then, as you go into Part A of KIND 1, what exactly do you expect to report externally, given Part A is not powered for statistical significance, I think you used the term that it would be a "good proxy" for Part B. So what would be a good outcome on part A and what might not be a good outcome?

Sure. Let me turn that to Jo.

Yes, thanks Sumant. So Part A has been designed really as to gather additional information for our pivotal program. So it's not been powered to show statistical significance. But importantly, it has the appropriate number of patients for us to be able to assess what the sample size needs to be and to be able to select a favorable dose for moving forward to the pivotal program. So that's exactly what we intend to use that data for. So we're comfortable with the patient numbers and what we can glean from that.

Our next question comes from the line of David Amsellem from Piper Sandler.

This is Tim on for David. Just 2 from us. First, could you provide some color on the inventory burn that we should expect towards the end of the year? I know you had previously guided to depleting that built up inventory towards the back half of the year. But given the lumpiness this quarter, we want to get your thoughts there. And then second, and relatedly, how does this tie into your thinking around your cash flow runway? I know this is asked before, so I guess I'll ask more directly, is monetizing oral DFK in some way on the table?